Pages

Tuesday, May 10, 2016

Ramanan — Output At Home And Abroad

Accounting identities are tautologies that say nothing about the world other than that the relevant accounts balance. As identities they are not functions, in which inputs determine outputs in terms of a rule.

However, accounting identities can be used in theoretical interpretation to arrive at causal explanation, but this requires examining relevant behaviors. For example, one entity's expenditure is a flow that increases another entity's income, which will have a cumulative influence on a stock.

In my view, economics outside of considering the world economy, that is, open economies linked by international trade and capital flow, is woefully incomplete. Generally speaking, macro economic models are national, and the open aspect is something of an after thought that can be tacked on as "the ROW." The invisible hand of free trade, free markets, and free capital flows Is supposed to work its magic through market forces in the long run. If that is not happening, then the solution is more deregulation, more privatization, more "structural reform," and more wage flexibility.

The world much more complicated than that, and failure to understand the dynamics leads to junk economics and ill-informed policy decisions. Meanwhile, the social fabric is fraying with predicable social and political consequences.

Accounting provides an ex post framework for understanding what happened, but it doesn't inform either about the present or the future other than trends. This where theory based on a correct understanding of causality and real time reporting of data comes in. Causality is basically about the rules that govern functions that determine outputs from inputs. Without that, it's a matter of stabbing in the dark with only trends (correlation) as a guide. The key to understanding, however, is the turning points — global and local maxima and minima. Looking only at the past without understanding the causality correctly is the best we have in many cases, and it's proving not good enough.

My impression is that the so-called experts are pretty clueless about what happening now and what to do about it. This is serious business since many of the figures being reported ex post should't be happening or persisting. It's possible that the wheels are coming off but we really don't know enough either to be sure or to know what to do about it.

Many of us here assume an MMT based approach would work but that needs to be tested and so far no one in a position to act is thinking along these lines. Current thinking is to keep repeating what hasn't worked in the belief that we are just aren't doing enough of it yet or doing it long enough, but that it will work "in the long run." Well, it's a pretty long run already, and conditions seem to be heading south.

When I say "we," it is the global we of humanity. We are all in this together in the global village.

"Accounting provides an ex post framework for understanding what happened, but it doesn't inform either about the present or the future other than trends."

In modern control/regulatory theory, this is known as "Integral Action"... because all you can do with ex post sampled data, is an integral over dt... delta t... from t1 to a t2...

The units you end up with must have a time component in the numerator... so it would be like "$-days" or "$-months"....

Like you say, this ex post or "Integral Action" implies NOTHING about the future from a time domain perspective... all you can do with it is to compare it to a target value measured over the same ex post period and make regulatory adjustments based on that at the present time... but you cant assume this is going to get you closer to the target value in the future, what you have to do is to sample expost AGAIN after another sampling time interval takes place and check it again...

It seems to me what these people are doing which is a MAJOR mistake in treating the time domain is that they are thinking that they can make PREDICTIVE statements or PREDICTIVE assumptions based on this Integral Action... this violates everything that is known and practiced in the academe of Control Theory which successfully controls/regulates everything we use... aircraft, HVAC, Automotive, power systems, etc .... to be able to make PREDICTIVE statements/assumptions, you have to be examining Derivative Action ie the rate of change PER UNIT TIME .... Integral Action tells you NOTHING about the future...

In fact, if you try to project the future with Integral Action, and make adjustment it can make the volatility/departure from target WORSE than doing nothing at that point in time especially if you are in reality close to the target and just dont know it ... this imo is what they are actually doing in fact... they are making it worse in both departure and volatility by using Integral Action to project in time domain... its REALLY bad science/engineering... inept, etc...

So when you say here: "Causality is basically about the rules that govern functions that determine outputs from inputs."

yes you are correct imo, and what you have to do is to take the Derivative of that function you identify here, and then use that Derivative to make projections about where the output will be in the future...

I dont see anybody outside of our small group looking at any form of Derivative Action of a function when they are making predictive statements out there related to economics... especially policymakers so we get huge departures from target in magnitude and more volatility than if they just did nothing going forward...

I would point out that they have actually done NOTHING for about 3 or 4 years now and volatility is low and we are in domestic balance from a fiscal perspective... so this is manifestly how the system naturally stabilizes if they do nothing... ie low volatility and domestic balance.... so when they raise the rates and start to mess with taxes again, expect increased volatility and a return to higher domestic deficits again imo...

" As identities they are not functions, in which inputs determine outputs in terms of a rule. "

This is a very important insight, that most economists don't really understand. A function is a transformation, in which some information is received, and a process happens on that information, giving an output which has a different structure of that which was the argument to the function.

Input > Transformation > Output ; identities are not functions, just a statement about the current state of information given.

This has profound implications on how we understand nature, natural 'laws' are functions (the transformation of an input to an output); identities are not functions, but assertions of facts.

Tom, maybe like this to sharpen it: " it doesn't inform either about the present or the future but only PAST trends." to eliminate "projection of current trend" which no one working in the academe of Control Theory would ever do... they look at DERIVATIVE Action ONLY to project in time domain...

"so when they raise the rates and start to mess with taxes again, expect increased volatility and a return to higher domestic deficits again imo..."

So ZIRP is right, in the end... because market prices arrive to a point through the function of 'marketplace price discovery', and the credit system does it work. But it doesn't, because you haven't worked out that derivative you talk about, you don't know how the system will be in 5 years, when the system is being driven mostly by credit expansion and that credit expansion has shift from household sector to corporate sector.

Not doing anything is not an option, because is not "everythign is awesome, except for 5%". If it were there wouldn't be the political problems there are now for the status quo and people wouldn't be angry (on average).

It's obvious that in an human driven system, humans have to take action collectively if they want to achieve certain outcomes (so we write our own functions about how the economy manages). Research points out humans are not happy and don't like systems like the one we are going with, instead they are miserable. Most humans don't enjoy extreme inequality, neither are nurtured/natured to be in a constant state of stress (due to economic conditions), hence problems happen. This is were the system is going "on it's own", it's not "everything is awesome". But doing something (by current crew in charge of the boat) may end up being worse for Team Human, on that I can agree, and accelerating things.

If we don't we will arrive to an other state, but not one which is pleasant to the majority. But that is a political choice, how we want our society to be, or end up being (gaols). There is no "right" or "wrong" answer, humanity can be "fine" with a majority being miserable, as it has been like that for most of our history since the first civilizations. But constantly struggling to uncontrollable things is not our natural state, let's not fool ourselves.

Right with a permanent ZIRP as official policy, imo expect a ONE TIME asymtotic adjustment in asset values UP like Buffet said.. then very low volatility from there on...

And yes we are stable but at a low state... this low state can be increased to a higher state via increase in leading flows.... which will then stabilize again eventually if they do nothing but at a higher state...

If no ZIRP, and then they start raising in earnest, then we get more fiscal thru interest income (distributional aspects aside please) BUT... volatility will increase markedly from current...

So the risk free regulatory rate has 3 effects, 1. increases/decreased volatility (see Black-Scholes formula), and 2. is used to arrive at PRICES for all assets (see Warren Buffet)... with LOWER rates fomenting HIGHER asset prices... and 3. Increase/decrease leading flow thru Interest Income channel...

So if they start raising in earnest, we will get somewhat larger sell offs than what we have grown used to in here (increased vol)... will take more of Mike's 'mental game' to be able to ward off the fear with that increased volatility... but up trend will be supported via increase in leading flow thru interest income channel....

Tom, maybe like this to sharpen it: " it doesn't inform either about the present or the future but only PAST trends." to eliminate "projection of current trend" which no one working in the academe of Control Theory would ever do... they look at DERIVATIVE Action ONLY to project in time domain...

Hume observed that correlation regarding the past (trends) is assumed to be a continuous function (causality), but this assumption is without a foundation in knowledge. It's a belief.

A lot of science is based based on correlation where the causality is (as yet) undiscovered and so there is little or no theory supporting it.

Economics actually does OK as long as the trend holds, like trend following it trading. The problem with trend following is when the trend changes. Economists and traders spend a lot time trying to figure out the approaching turning points before they occur. But to do this it would be necessary to understand the underlying causality in order to be able to use functions rather than statistical methods like mean regression.

It's an issue of going from static to dynamic models and from simple systems to complicated and then to complex. Getting any reliable degree of precision in the social sciences if still very iffy. In many cases, trends is the best that can be done with current methods and theoretical understanding. Moreover, in the social science there is a raging debate over mythology and theory, since no one is accurate enough at prediction to carry the day.

This is real problem lies in policy science, which is not only unreliable but also subject to ideology, so instead of cooperating on improving outcomes, the sides are competing for position in the hierarchy of power and influence.

Well that imo is because tptb dont have the correct training. .. goes to chaos accordingly and then its every man for himself.. dog eat dog... etc.. ie morons in control.... .The system is not that complex imo if we didn't have anything else to do I think we could get something workable put together in a relatively short time..